For executives, boards of trustees, and fiduciaries in higher education, managing risk is crucial for effective governance. Total Cost of Risk (TCOR) encompasses all expenses related to risk management, as well as the expenses from litigation, regulatory fines, and other damages, and represents a major financial commitment that can strain budgets and divert resources from an institution’s core mission. With rising insurance costs and increasingly complex risks, optimizing TCOR should become a strategic priority.
Effective TCOR management includes the utilization of tools like increasing risk retentions, captive insurance companies, and aligned assurance efforts. By investing resources in their assurance functions, institutions can reduce costs, eliminate redundancies, and align risk management with their mission, ensuring long-term resilience. While investing in risk management is essential for a successful university, unmanaged TCOR can limit funding available to support the university’s mission.
What Is the Total Cost of Risk?
"By investing resources in their assurance functions, institutions can reduce costs, eliminate redundancies, and align risk management with their mission, ensuring long-term resilience."
Total Cost of Risk is a comprehensive measure that includes all costs related to risk management (risk financing and risk mitigation) within an organization. This covers direct costs (insurance premiums, deductibles, and claims) and indirect costs (administrative expenses, lost productivity, and reputational damage). These costs can be substantial and are influenced by external factors like legal fees, environmental health and safety, emergency management, compliance, and internal audits. By calculating and managing TCOR, organizations can better understand their overall risk exposure and make more informed decisions about risk mitigation strategies.
These components can collectively cost millions each year, putting pressure on budgets for academic programs, student services, or capital projects. Without coordination, these costs can grow due to duplicated efforts and inefficiencies.
Collaborating Assurance Functions to Optimize TCOR
A key strategy for managing TCOR is promoting collaboration among assurance functions to eliminate redundant costs and duplicated efforts. Too often, these functions operate in silos, resulting in inefficiencies such as multiple departments conducting similar risk assessments or
"By breaking down silos, institutions can reduce TCOR and enhance risk management. Collaboration also improves board-level reporting, providing fiduciaries with a more transparent and more integrated view of risks."
investing in separate software systems that don’t share information. By coordinating these efforts, institutions can streamline their processes, reduce costs, and improve risk oversight.
Practical Steps for Collaboration:
Unified Risk Assessments: Instead of conducting separate ERM, internal audit, or compliance risk assessments, assurance functions can perform joint risk assessments to identify shared vulnerabilities and eliminate redundancies in work plans.
Centralized Data Systems: Invest in a unified governance, risk, and compliance (GRC) platform that monitors audit findings, compliance violations, risk management data, and Environmental, Health, and Safety (EHS) incidents. A single GRC system can help prevent duplicate software subscriptions and provide a comprehensive view of risks.
Cross-Functional Committees: Create a risk oversight committee with members from each assurance function to coordinate mitigation strategies, share resources, and align priorities.
Centralized Assurance Functions: A trend in higher education is to unify assurance functions into a single department led by a manager who can oversee TCOR centrally and build a cost-effective team that adds value to the university.
By breaking down silos, institutions can reduce TCOR and enhance risk management. Collaboration also improves board-level reporting, providing fiduciaries with a more transparent and more integrated view of risks.
Reducing the Cost of Insurance
Many universities dedicate significant effort to minimizing annual insurance premium increases but overlook other strategies that could lower TCOR. Some universities can assume more financial risk through retention, self-insurance, and deductibles. However, many are too risk-averse to pursue these options, even though they can reduce insurance costs and improve cash flow. An often-missed tool for reducing TCOR is a captive insurance company.
A Captive Insurance Company, a wholly owned subsidiary created to insure an institution’s risks, is a powerful tool for further optimizing TCOR. Unlike commercial insurers, captives provide control over premiums, claims, and risk strategies, allowing coverage to be tailored to the institution’s specific needs. Commercial insurance companies typically have an expense load of 28-32% of every premium dollar, making captives a much more efficient way to use each premium dollar.
In a volatile insurance market where premiums are rising, captives help stabilize costs by retaining risk internally and reducing dependence on expensive commercial policies. Surplus funds from captives can be reinvested into collaborative assurance initiatives to enhance risk mitigation. The surplus funds paid to an insurance carrier never return to the university, so a profitable captive offers a university an effective way to lower TCOR.
Many universities dismiss captives because they only consider the impact on property and casualty insurance programs. However, captives can also be used to manage employee benefits. By funding health insurance, voluntary benefits, or wellness programs through a captive, institutions can:
Reduce Costs: Self-funding removes commercial insurers’ 15-20% administrative fees, resulting in significant savings.
Customize Plans: Personalized benefits, such as mental health support, boost employee retention.
Stabilize Costs: Captives smooth premium volatility.
Utilize Data: Claims information supports wellness initiatives, lowering long-term benefit expenses.
These savings can fund collaborative assurance initiatives, provide more capital for the captive to have the financial resources to take more risk, and be reinvested by the institution to reduce the cost of benefits for employees, further optimizing TCOR.
A Path Forward
Managing TCOR in higher education requires a strategic approach that integrates assurance functions and leverages the broad expertise of those functions. These integrations, GRC platforms, and captive insurance companies should have board support. Additionally, board members should be asking leaders about investigating these initiatives as part of the risk oversight responsibilities.
By promoting collaboration among risk management, audit, compliance, EHS, and emergency management, institutions can eliminate redundancies, lower costs, and strengthen risk oversight. These cost savings, whether from exploring and starting a captive or aligning assurance functions, can be reinvested into the institution to support innovation and improve the student experience.